Michael Gray, CPA's Real Estate Tax Letter
November 17, 2017
© 2017 by Michael C. Gray
ISSN 1930-0387
A monthly report focusing on tax issues for the homeowner and real estate investor.
Table of Contents
- The year will soon be over. Will you be ready?
- First real estate tax payment due date is December 10.
- How will real estate be affected by tax reform?
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Follow me on social media!
- Check out my blog.
- Do you know about our other newsletters?
- Subscribe/Remove from Michael Gray, CPA's Real Estate Tax Letter.
The year will soon be over. Will you be ready?
It's time for year end tax planning. With the holidays, Michael Gray's availability will be limited. Call Dawn Siemer weekday mornings at 408-918-3162 to schedule your year-end tax planning appointment now.
First real estate tax payment due date is December 10.
Remember to make your first real estate tax payment by December 10 to avoid a nasty penalty. Some people like to pay the full amount to accelerate the tax deduction for the second installment. Before doing so, check whether you are subject to the alternative minimum tax for 2016, which eliminates the tax benefit.
How will real estate be affected by tax reform
There are a number of proposals affecting real estate in the Tax and Jobs Act now before Congress. The legislation is still being negotiated. Congress hopes to pass the legislation by the end of 2017, but it's questionable whether they will be able to get enough Republican Representatives and Senators to support it to pass it. (No Democrats are expected to vote in favor of the legislation.)
Here are a few highlights. Most of the provisions would be effective for tax years beginning after December 31, 2107.
- Under the House proposal, home mortgage interest would be limited to a $500,000 acquisition indebtedness mortgage for a principal residence only. (Mortgages incurred before 2018 would be grandfathered.) The Senate would retain the current $1 million limit for a principal residence and a second residence.
- Interest deductions for $100,000 of home equity indebtedness would be repealed.
- Under the House proposal, the deduction for real estate taxes would be limited to $10,000. The Senate would repeal the deduction.
- Note that the increase in the standard deduction to $24,000 for married filing joint and $12,000 for other individual taxpayers and the elimination of most other itemized deductions will mean taxpayers located in lower cost states (outside New York, California, Hawaii, etc.) probably won't get any tax benefit from home ownership.
- Under both proposals, the holding period to qualify for the $500,000/$250,000 exclusion for sale of a principal residence would be increased from two out five years before the sale to five out of eight years preceding the date of the sale.
- The deduction for moving expenses and the exclusion for reimbursement of employee moving expenses would both be repealed under both proposals.
- Although Section 1031 exchanges would be repealed for most property, real estate would continue to qualify for them under both proposals.
- Under the House proposal, net income from a pass-through entity passive activity would qualify for a maximum tax rate of 25%. That would include most pass- through rental real estate operations. Active businesses, such as real estate professionals, would only have 30% of their pass-through income eligible for the 25% rate. If a sole proprietorship is not considered a pass-through entity, some single-owner real estate operations might be reorganized as S corporations. (Personal service operations wouldn't qualify for the 25% rate.) The tax rate for C corporations would be a 20% flat rate for most corporations and 25% for personal service corporations.
Under the Senate proposal, an individual would generally be eligible to deduct 17.4% of domestic qualified business income from a passthrough entity, including partnerships, S corporations and sole proprietorships. Income from a service business would only qualify for taxpayers whose taxable income doesn't exceed $150,000 for married filing joint or $75,000 for other individuals. For partnership and S corporation income, the deduction would be limited to 50% of W-2 wages from the passthrough entity. (The Senate apparently didn't consider that partners don't have W-2 wages.) The tax rate for all C corporations would be 20% under the Senate proposal. (Many businesses would probably be reorganized as C corporations if this provision is enacted.)- The alternative minimum tax would be repealed.
- Under the House proposal, the estate, gift and generation-skipping tax lifetime exemption would initially be doubled from $5 million as of 2011 to $10 million, indexed for inflation. The estate and generation-skipping tax, but not the gift tax, would be repealed after 2023. The gift tax rate would be reduced from 40% to 35%. The stepped-up basis rules for inherited property would be unchanged.
Under the Senate proposal, the estate, gift and generation-skipping tax lifetime exemption would be doubled. The tax rate would be unchanged and the estate and generation-skipping tax would not be repealed.Please share your good experiences with Michael Gray, CPA.
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Financial Insider Weekly past episodes
After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes available at https://www.youtube.com/user/financialinsiderweek.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter. Write mgray@taxtrimmers.com.
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